Sale or Donation. Which is more tax efficient?

Am quoting here a post from another blog. It’s a good read for all property owners. 

“In my professional life, I am always asked the question on which is the tax efficient way of transferring capital property or property not used in business. Is it through donation or sale? Well, the answer depends on two factors, namely: i) value of the property and ii) relationship of the donor to the donee.

If the donation is made to a “stranger”, then sale is more tax efficient than donation. This is because the tax rate for donation to a stranger is 30% while the tax rate for sale is 6%. Further, even if donation is not subject to documentary stamp tax and sale is subject to 1.5% documentary stamp tax, nonetheless, the total tax rate for donation is still higher at 30% compared to the total tax rate for sale of 7.5% ( capital gains tax of 6% and documentary stamp tax of 1.5).

For example, if a father donates a house and lot worth PHP 3 million to his son and the bride-to-be, then 50% of the donation that pertains to the son shall be subjected to the graduated tax rate on donation, while the remaining 50%, pertaining to the donation to the future daughter-in-law shall be subject of 30% tax rate, because the donation made by a father-in-law to his daughter in law is considered or treated by law as donation to a stranger.

The law defines a “stranger” as a person who is not a brother, sister (whether by whole or half blood), spouse, ancestor and lineal descendants; or relative by consanguinity in the collateral line within the fourth degree of relationship (up to first cousin).

If the transfer of property is made from one person to another person who is not a “stranger”, as defined by law, then donation is more tax efficient than sale, at least up to a certain value of the property.”

This is based on the following reasons:

a)   

     Donation is not subject to documentary stamp tax while sale is. Documentary stamp tax for a sale transaction is equivalent to 1.5% of the selling price or fair market value of property whichever is higher.

b)    Tax rate for a sale transaction is 6% while the tax rate for donation is based on graduated rates from 2% to 15% depending on the value of the property.

For example, if a property worth PHP 500,000 is donated, the amount of tax for this donation would be PHP 8,000.00, while the tax rate for sale would have been PHP 37,500, had the transaction been a sale. Donation is thus more tax efficient for this particular case.

Another example; if a property worth PHP 4,500,000.00 is donated, the amount of tax for this donation would be PHP 354,000.00, while the tax rate for sale would have been PHP 337,500.00,, had the transaction been a sale. Thus under this particular case, sale is more tax efficient.

Below is a tax table for donation type of transaction that will help you determine the corresponding tax dues if the transaction is a donation. Compare this with the existing tax rate of 7.5% (6% + 1.5%) for a sale transaction.

Effective January 1, 1998 to present

Net Gift Over	But not Over	The Tax Shall be	Plus	Of the Excess Over
	100,000.00	exempt
100,000.00	200,000.00	0	2%	100,000.00
200,000.00	500,000.00	P 2,000.00	4%	200,000.00
500,000.00	1,000,000.00	14,000.00	6%	500,000.00
1,000,000.00	3,000,000.00	44,000.00	8%	1,000,000.00
3,000,000.00	5,000,000.00	204,000.00	10%	3,000,000.00
5,000,000.00	10,000,000.00	404,000.00	12%	5,000,000.00
10,000,000.00	and over	1,004,000.00	15%	10,000,000.00

Notes:

1.	Rate applicable shall be based on the law prevailing at the time of donation.

What everyone ought to know about the Family Home

Family home

A family home is usually the dwelling place in which a married couple, with their children, ordinarily resides. Basically, the family home would be registered in joint names of both spouses, being a conjugal property, except if the house was inherited through succession or bought before the marriage by either of the spouses.

Not everyone knows that the family home can have beneficial effect on taxation. As a tax saving tip, the family home can be exempted from certain taxes, or used as a deduction to minimize or save on taxes.

Your accountant or lawyer should be advising you of the following key tax information where the family home is subject of taxation:

1)      Exemption from Capital Gains Tax. Generally sale of real property not used for business, such as family home is subject to capital gains tax. However, there the proceeds from such sale is to be utilized in in acquiring or constructing a new principal residence within eighteen (18) calendar months from the date of sale or disposition, such sale is exempt from the capital gains.

This exemption from capital gains tax is subject to the following conditions:

a)      The historical cost or adjusted basis of the real property sold or disposed shall be carried over to the new principal residence built or acquired;

b)      The Commissioner shall be duly notified by the taxpayer within thirty (30) days from the date of sale or disposition through a prescribed return of his intention to avail of the tax exemption;

c)       The said tax exemption can only be availed of once every ten (10) years;

d)      If there is no full utilization of the proceeds of sale or disposition, the portion of the gain presumed to have been realized from the sale or disposition shall be subject to capital gains tax. For this purpose, the gross selling price or fair market value at the time of sale, whichever is higher, shall be multiplied by a fraction which the unutilized amount bears to the gross selling price in order to determine the taxable portion and the tax due.

2)      Deduction from Gross Estate or Exemption from Estate Tax. Where the family home is part of the gross estate of a deceased, the same may be written off or deducted up to the amount equivalent to the current fair market value of the decedent's family home not exceeding One million pesos (P1,000,000). As a requisite for the deduction, a barangay certificate of the locality where the family home is located must be submitted.

So before entering into any transaction affecting your family home, be reminded of these tax schemes to save on taxes. 

11 Possible Deductions from your Estate Tax

In computing estate tax, the amount can sometimes be so outrageous and irritatingly hefty it can nearly wipe off the total net amount the heirs will be receiving from the estate of a deceased.

Oh yes, I have definitely encountered widows who wished their husbands have done some estate planning. It is even worse when people have failed to settle their estate taxes for the longest time so that penalties and surcharges have gravely and enormously accrued. This is such a frustrating tax condition because considering the grief/state the heirs might still be in, the last thing they need is the government telling them:   “We are sorry for the death of your loved one, but this is how much you owe us and you still have to pay us”.

Sadly, there is no way getting around it because we have to submit to the power of the government to tax us, even if we are already 6 feet below the ground. Don’t they say that tax, aside from death, is the only thing that is certain on earth? Talk about ironies.

That is why as property owner and/or prospective property owner it won’t hurt to know some key information about estate taxation. Apart from estate planning, (this was already discussed in previous blog) below are some deductions one should consider or prepare for to write off as deductions from the estate of a deceased or decedent.

A)   If the decedent is a Citizen or a Resident, the following deductions are allowed: 

1.    Actual funeral expenses or in an amount equal to five percent (5%) of the gross estate, whichever is lower, but not to exceed Two hundred thousand pesos (P200,000);

2.      Judicial expenses of the testamentary or intestate proceedings;

3.   Claims against the estate subject to certain documentary requirements such as i) duly notarized debt instrument executed at the time of indebtedness; and ii) if the loan was contracted within three (3) years before the death of the decedent, a statement showing the disposition of the proceeds of the loan;

4.   Claims of the deceased against insolvent persons provided such value is included in the gross estate;

5.    Unpaid mortgages upon, or any indebtedness in respect to, property provided the value of decedent's interest therein, undiminished by such mortgage or indebtedness, is included in the value of the gross estate.

6.    Property Previously Taxed. – this deduction is otherwise called vanishing deductions and involves a property previously taxed (for either donor’s or estate tax) because of the death and/or transfer of prior decedent to the present decedent. The amount to be deducted, equal to percentage value of the property, depends on time frame of the death of prior decedent from the death of present decedent. For example, if prior decedent died within one year to the death of the present decedent, the deduction is equal to 100% of the value of the property. Such value to be deducted vanishes by percentage as the time frame of death increases. Below is the table of percentage value to be deducted:

 100% - 1 year from death

                       80%   - More than 1 year from death but not more than 2 years

                       60%   - More than 2 years from death but not more than 3 years

 40%  -  More than 3 years from death but not more than 4 years

 20%  -  More than 4 years from death but not more than 5 years              

7.    Transfers for Public Use. – All amounts given as bequests, legacies, devises or transfers to or for the use of the Government of the Republic of the Philippines, or any political subdivision thereof, for exclusively public purposes.

8.   Family Home. - An amount equivalent to the current fair market value of the decedent's family home: Provided, however, That if the said current fair market value exceeds One million pesos (P1,000,000), the excess shall be subject to estate tax. This deduction shall be supported by a Certificate by the barangay captain of the locality.

9.    Standard Deduction. - An amount equivalent to One million pesos (P1,000,000).

10. Medical Expenses. - Medical Expenses not exceeding Five Hundred Thousand Pesos (P500,000) incurred by the decedent within one (1) year prior to his death which shall be duly substantiated with receipts.

11.  Amount Received by Heirs Under Republic Act No. 4917. - Any amount received by the heirs from the decedent - employee as a consequence of the death of the decedent-employee in accordance with Republic Act No. 4917: Provided, That such amount is included in the gross estate of the decedent.

Watch out for my next blog for allowable deductions in case the decedent is a non-resident of the Philippines.